how to set up escrow for lease options

There is alot of questions on this post,And they all make since and i appreciate the responses and would like to answer all these questions,it seems like alot of you have more experience in this and have been doing lease options a long time,If you have any questions about any of these deals because i've done several like the one above please send me a pm and i'll get back to you with the criteria.If i have made mistakes i will be the first to admit them and post them right here on this website so everyone can learn from them.Hopefully that is not the case but mistakes are inevitable in this business and thats how you got to learn,I admit i am proud of myself for taking action and anyone else who is making this a reality in their lives instead of just talking.I know that if we all contribute to this website with deals we've done we'll just make it that much easier for others who are getting into this business and are kinda lost,I'm definately not a real estate guru or genious of any sort and i'm still learning and i know even if i have made mistakes they will never stop me and it should not stop anyone else either.

thanks for clarifying that
regards

I have read and re-read this prob 5 times and am understanding how to do it. There is a new law or regulation in NC that is starting Oct. 1 and I'm not exactly sure what it entails but has to do with lease options. Anyone out there familiar with this new legislation and if it would prevent me from doing these deals outlined like FreeLance Investments is doing it?
Aaron

TRSD did a great job explaining it. I have a little more to add.

If a loan is kept current, it costs a bank 55-100K to foreclose on it, or call the note due. To justify to the board of the bank to foreclose to 'teach someone a lesson' rarely happens because of the costs involved to do so. ALso, banks get 1000s of payments. They don't take note of who is making payments on the mortgage. They just care they got a check. I have a thread on here of an article written by an attorney that talks about the due on sale clause. Search for 'There is no due on sale jail'.

I really appreciate you sharing this strategy. If there is a flaw there is no doubt it can be tweaked to work. I hope it is just a misunderstanding on our part. You are doing good getting out there and doing it!

It is CERTAIN we will SUCCEED!

tons of good information on here, also anyone can pay anyone's mortgage payment. We had a mortgage once, and my name was not on the loan, and I could call in anytime and make a payment I just wasn't allowed to discuss the account information or make payment arrangements. It's like a bank, anyone can deposit money into anyone's account, but you can't have access to the information on the account unless your name is on the account. You can always rent out your home when you have a mortgage on it, and that's what a lease option is, a renter with the option to buy.

You may want to create a new thread on this; I'm sure it will be of interest, but I don't know anything about it (and I will need to as I have property in NC). It will get more attention if a new thread is started about it. Best to you

It is CERTAIN we will SUCCEED!!!

Hi, I am new to investing and new to the site. This was very good information, thank you. I must admit that I was very skeptical about getting involved in real estate. After reading Dean's book, Profit From Real Estate Right Now! followed by joining this site I am very excited, optimistic and ready to define my destiny once again. I am a true believer in defining my own destiny. However, that does include recognizing, understanding and being able to implement strategies proven to be successful. I am a business owner, and provider of mental health services for youth and adolescents. Due to my health this past year, my business is not doing well at all financially, in addition to bad credit. I am getting stronger everyday physically and Deans book has helped me to remember my strengths and get it together mentally. This comment on lease purchases was great, very informative and I am motivated to take this journey to the next level. This is a great website and everyone seems to be very helpful. I can't wait until i'm experienced enough to offer my investment advice to others just like me. Thank you Dean and everyone else on this site for the motivation you give. It is so very truly appreciated. I'm sure I will have so many other questions and concerns, but this was a fantastic start :0)

You send a letter to Lender written by owner assigning You as the trustee, asking to forward all correspondence, etc. to your address (p.o. box), and inform them that all future payments will come from You.
You send a letter to insurance co. written by owner, to add You as trustee on the insurance policy as the loss payee and additional insured...
(in these letters do not put your LLC as the name

then you get a Quit Claim Deed signed by owner and record it with the county, etc.; then you have the owner set up a Family Trust (land trust) with Your name as the trustee; The owner is 'deeding' their property to themselves with You as trustee-this will prevent the triggering of the Deed to be due. This document needs to be recorded as well. (these two documents are prepared by your Title agent)
Lastly, you draft a document to Assign the Beneficial Interest in the Trust to YOU (you do NOT record this document until you're ready to refinance.
(The house, insurance will remain in the name of the owner until you sell; if your lease tenant stops paying, 1st owners credit gets hit, not yours.

Valerie

I think your strategy is great; I think the only 'tweaking' you may have to do is to make sure you're not giving the new buyers 100% credit towards the mortgage balance with their payment, but instead the amortized value at the end of the 5 year lease (+ your profit); also, make sure that the monthly payment includes taxes and insurance.
thanks for sharing you succes strategy,
Valerie

is not 100% guarantee that the loan won't be called due. Unless you leave at least 10% beneficial interest in the seller's name. That is the magic number to keep the mortgage from ever getting called due. (This is how I did my first Success Academy deal, awaiting my seller to get back from out of time to officially sign everything, but I've been on paying the mortgage since September.)

In the rare event that a mortgage is called due, I've heard of an investor getting letters from the banks calling the loan. The investor ignored the letter and kept paying the mortgage; because it was kept current, it was never executed. Its if someone stops paying the mortgage when getting this letter that the bank can actually justify doing something about it.

But in this market with all the foreclosures banks have; its so RARE that they would want to call a paying mortgage due, it isn't something to worry about.

Awesome information on Lease Options!!! I'm excited to try this out in my area. But, before I do. Does anyone know if Sandwich Lease Options are acceptable/legal to execute in Texas? Alternatively, where can one find out? Thanks. Marie

I have two more questions I have never seen addressed anywhere on this site.

1) Do you ever do a title search to make sure there are no additional liens on the house before the lease option?

2) If the owner is having financial problems and someone sues them for other outstanding debts, etc, what protects the house if it is still technically in their name? Of course, if it is underwater, there is no equity, but what if there IS equity? Does filing the quit claim deed guard against that?

Karen

You ask two very good questions.

1) Yes, I always run a simple title search prior to offering my lease option agreement. To protect myself further, I include an indemnification clause for any other lien outstanding that I was not told about up front.

2) This is the bigger problem. This is why I like to purchase homes on a "subject to" basis as the home gets out of their name. If it remains in their name and a judgment is entered against the previous owners, a lien can be placed upon the house. It will have to be paid off prior to the resale to your lease/option tenants. Obviously, this reduces your profit or can eliminate it. The other thing that can be a problem is the death and/or divorce and/or bankruptcy of the sellers. It can cause quite a problem.

Therefore, please enter a L/O with "eyes open". I have quite a few of them that I acquired over the last few years and some of them have had some problems caused by the current economic environment, which I couldn't foresee. Just protect yourself and realize all of them don't work out (most do) becuase of things you just can't protect yourself from.

Thanks so much for the input! Those were questions that had been nagging at me and I kept forgetting to ask.

Would you mind sharing the indemnification clause that you use?

Karen

love your post and your way of thinking out of the box. in IN, we cannot do a L/O for more than 35 months, or it becomes a land contract and then the T/B has equitable interest and has to be foreclosed on. not sure how to get around that at this time.

for end profit and rent credits, that all has to be added on to my purchase price. i decided not to offer rent credits because i will just offer the lower price and if asked about it, will explain. again, here in IN, we have to offer rent credits up front, so if they are late with their rent, break the lease, whatever, i would still have to give them those rent credits. i'm not willing to do that.

i have not been able to find an escrow company in my area. i will have to do a search on that, but if you have any suggestions, i would love to hear them.

thank you for your military service.

What I want to know is where is Ranger, his last post on this thread 9/28/10

What was the outcome?

Jim

I have been in touch with him. He is busy, busy! He has done at least 27 deals now!

Karen

.

I'm not going to read the entire post and answer everyones questions,with all due respect.Lets break down the mechanics of these types of deals and make them simple.
I'll tell you this before anything,if your new to real estate investing you must learn to be creative,like you learned in dean's books if you paid attention,if it sounds crazy,your probably onto something that will make you money.

Inflation
Inflation as most of you know does'nt affect the value of a home as soon as you buy it.What about Inflation in the long term.

For example say inflation is 3% anually.
Lets take $300,000 and factor in inflation for 5 years in the future using 3% as the inflation rate. It comes out to $347,782 in 5 years.
Go to an online inflation calculator. www.calculatorweb.com and do the math for deals.In 10 years 3% on $300,000 would be $403,175.

If you already dont know why i'm talking about inflation you will see in a minute how to make inflation work for you.

Appreciation
We all know what appreciation is.Home values increasing in a sellers market/comparable sales "Up Cycle".Sweat Equity.If you havnt read deans be a real estate millionaire book i suggest you do.

Buyers
You all should know how to market for buyers

Sellers
You should know how to market to sellers also

I have no money is no excuse-craigslist-cheap newspaper ads-fliers etc...

Put it all together

Motivated seller = Opportunity
Uh oh,the seller is negative $50,000 in equity,just like everyone else,i'm in california so obviously this is realistic.Alot of times people owe hundreds of thousands more.Refer those deals to an agent who handles short sales,Mandatory team member.Easy to find.

The seller owes $300,000,our numbers above.
The property is in good condition,maybe some small repairs.,Thats Ok.

The FMV is $250,000

You negotiate with homeowner to either #1 "Subject To"and take ownership leaving the mortgage in their name and put the property title in a "land trust".#2 give you a 6 year lease option with a renewal clause if you or your Assignee "Buyer" fulfills all the terms and conditions of the contract.The monthly principle balance reduction from the Owners loan amortiztion is your monthly credit to the purchase price,The purchase price is the loan balance.

So now we take $250,000 The current "MARKET VALUE" not the "LOAN BALANCE" and factor in inflation at 3% for 5 years.It comes out to $289,819

Now lets say the monthly principle reduction from the loan balance is $200.00/month
$200.00 x 60 months "5 years" would be $12,000
so now the loan balance is $288,000

So you might have around $2,000 equity,Thats week right?

Appreciation
We all know how real estate cycles work ,thanks to dean,so eventually property values will start increasing,it inevitable.

so lets say the market picks up during those 5 years and the property value appreciates $40,000,or even just $20,000,always lowball "underestimate" your estimates,just a little not to much,it will make the deals safer for your buyers.

So lets add $20,000 to $288,000. Now the property is worth $308,000 and you got $22,000 in equity.That equity can be used Via the agreement of the contract for the down payment.

Play around with these numbers,calculate how much the property would be worth in 10 years with inflation compared to how much would be owed on it.Due your homework and then do the deal.

IS it staring to play out for you guys now.The longer the lease term is the more Inflation and appreciation works in your favor.If you have a buyer who has bad credit and cant buy a house,even a buyer with bankruptcies and foreclosures.Get the longest terms possible.Have a renewal clause that says the buyer can renew the contract for an additional pre negotiated term and that they keep all the credit towards the purchase price if the contract is renewed.I would not suggest writing a lease option for say 12 years or some long lenght of time,if there ever was a court conflict the owner might have to foreclose on the tenant,a judge still might see an extensive lease option with a renewal clause as a mortgage in a court challenge.

Remember this,any property is worth what someone is willing to pay for it.Most People with bad credit dont care about the current value or dont even ask,if you have the contract your the seller so know what your doing and know what your talking about.

Create an opportunity- thats your obligation as an investor if you ever want to succeed-Be Creative = "Think a little different"!

thank you Ranger it helps a lot..

Thanks much for your service to all of us and for your detailed information you have shared here. Bookmarked and will be re read several times. Thinking outside the taken to the extreme.

You guys are of course correct. Ranger's strategy will not work and is a lawsuit waiting to happen.
Also, I hear this one all the time. I got it for $60,000 and I sold it through my L/O for $90,000. So I am making money up front(option payment), in the middle(monthly cash flow) and in the end(when I sell it for $90,000 and make $30,000)! THIS IS TRUE ONLY IF THE PROPERTY APPRAISES FOR $90,000!! Your tenant/buyer can only get financed for what the property appraises for at the point where the tenant/buyer exercises his option! Some one has to pay the difference out of pocket at closing if it appraises for less than your contract with your tenant/buyer or a price reduction must occur. I have heard of lawsuits popping up everywhere because of this exact problem. So, to make money on the back side you should L/O properties with equity. If you are counting on making money on upside down properties through appreciation I would be real careful for the next 5 to 7 years!!
Remember we are in this business to help people, both buyer and seller. Know what you are doing before you hurt someone, let alone yourself!!

Michael Mangham
MD Home Acquisitions LLC

that is why it takes a while to actually find a property that will properly L/O. When you find a deal, just don't try to get the last nickel off the table; you have to leave something so there is a positive equity balance for the end buyer. The L/O that worked in 2003 - 2006 have to be tweaked because of the terrible appreciation problem. Of course, so do a lot of other programs that worked then and the hardship/failure rate talked about on this website regarding those programs are a testament to that fact.

as well as some cautionary words. I guess it boils down to due diligence, and if the numbers work.

I think L/O is a great way to go, and certainly an option to use with in investing.

Thanks all for the help!!!

Just a few words on the rent credits towards the down payments. You need to be sure you do not give them much of a credit for the following reason. The renter after paying for several years decides to leave. However he/she feels they have what is called equitable interest in the house since they have been getting rent credit toward the purchase. Right of wrong, a judge could agree with them based on the amount they have paid. I agree a judge would likely not find for them if they are paying $50 per month. But a much higher amount might be different.
I suggest you use two separate contracts 1. Lease 2. Option agreement. Do not refer to the other in either one. And, do not say buyer and seller, only lessor and lessee. This with the lower amount of credit will make you in a better position to avoid equitable interest.

I've heard all over that if the owner owes $10k more than what the property is worth, it's still ok to do the deal.

It's funny because the lease option strategy is the one that leap out at me in the beginning as the one I wanted to pursue as it seemed the most lucrative and easy to understand. Plus you would have a constant stream of buyers and sellers almost effortlessly. Also the fact that it can all be done with no money out of pocket and you have 3 ways of getting paid for every deal was a real plus in my book. The down payment, the monthly cash flow and the money you make once the lease option is carried out.

I have just started in the investing game and everything you explained in your message was exactly what I had in my head for doing these lease options. I have two issues however, that I need clarification on. Do you ever run into a problem with people when you are presenting to them the purchase price of the house? I mean they are paying so much more than the house is worth. In your example above the guy is paying $145,000 over the value of the house. I mean, isn't that going to cause the same issues as when the value of houses skyrocketed and people were left with the huge mortgages on house that weren't worth half of what they owed. I can't help but thinking that doing so is not going to help anybody but just add to the current housing market problem? Please correct me if I'm wrong here or missing something. I mean there is no way that house is going to go up in value $145,000 in 5 years!

Also, in the example you gave you had put down that the renter would have paid the mortgage down $84,000 over the 5 years he was renting put that is just not so. Unless once again I am missing something here but the principal balance doesn't go down very fast over a 5 year period, most of the money is going toward interest. It would really depend on what the initial homeowners interest rate was and how long they had been paying on the house. I've owned my house for 10 years and the principal has gone down $12,000. So you need to rethink those numbers otherwise you may run into a heap of trouble 5 years later if you've told the renter that his payments over the 5 years would be going toward paying the balance down and giving him a figure of $84,000 less the agreed upon purchase price. I guess if you just said that a portion of his payments would be going toward paying the principal and not giving an exact figure you'd probably be ok. I'm not sure how that is suppose to be handled. Again, if you could clear that up for me I would be very grateful.

I apologize if I'm missing something here and would certainly appreciate it if you could clarify any misunderstandings I have on the issues above.

Good luck to you and I hope you keep plowing ahead! Kudos to you!

Leigh

Thank you to those people that have pointed out that there is indeed a problem with the lease option example that Ranger laid out above. I thought I was missing something or didn't understand the lease option strategy. So it is really implausible to do lease options on houses whose owners are upside down on their mortgage. Not to mention it really comes down to a question of ethics. It's not helping the end buyer out if he's paying considerably over market value on a house that no mortgage company in their right mind would loan money on as the appraised value would be so much lower. All that is doing is perpetuating the same problem that started the housing market fiasco to begin with. Dean stresses over and over in his book, webinars, and videos, that it's not a good deal unless everybody wins. In this case really, everybody loses because the end buyer couldn't get a loan at the end of 5 years anyway. And more than likely the house would end up back in the original owners hands, still upside down and facing the same dilemma that he was assured by ranger was going to be taken care of. Not to mention the chance that Ranger may be liable for some court action as a result of all this, from the buyer or the seller, correct? Although on the other hand maybe the seller would be better off because his mortgage would have been paid for 5 years and he'd be up to date on his payments and maybe after 5 years he would now be in a position to make the mortgage payments and get his house back. Ranger as the middle man would have had monthly cash flow money in his pocket over the 5 years, so perhaps only the poor end buyer would lose out big. He thought all this money he was paying was going toward his own house and now he's left with nothing. Interesting and a great big VALUABLE lesson for everybody in all this.

I hope you are able to get out of these deals with no lasting damage done Ranger. I don't think you did this maliciously at all but rather with the best intentions of moving forward which many of us have yet to do. But maybe this could be an example to run your strategies by the experts who have come before you or discuss your thoughts on these forums with others because as we've all just been witness too, numerous heads are better than 1! Good luck to all of you and God Bless Ranger who had the guts to lay it all out here for the rest of us to learn from!

Moxie, Try giving Krareng a PM. She has had a lot of experience with lease ops. In our area the market is changing fast into a sellers market since Ranger wrote all this info. If you are a member of the Success Academy I would call them also.

Andrew